Whether it is buying a home, starting a business, or funding a big investment, loans play a vital role in turning an individual’s aspirations into reality. However, lenders rely on a crucial factor to gauge the risk of lending – the loan-to-value ratio. It shows the financial amount they can obtain from their chosen lender. This blog contains all the essential details necessary to understand the LTV ratio.
What is a loan-to-value ratio?
The loan-to-value (LTV) ratio represents the portion of the property’s value that the lender is willing to lend as a loan amount. Lenders must assess the loan sum they can approve based on the borrower’s property’s value, ensuring it aligns with their repayment capacity and does not exceed the property’s price.
What is the formula to calculate the loan-to-value ratio?
To calculate the loan-to-value ratio, use the formula mentioned below:
LTV Ratio = (Loan Amount/ Appraised Value of Collateral) X 100.
For instance, if someone wants a loan of Rs.10 lakh and their property is appraised at Rs.15 lakh. Then, their LTV Ratio will be
(10,00,000 / 15,00,000) X 100 = 67%.
So, in this case, the loan-to-value ratio would be 67%. However, it is important to remember that various factors can influence the actual LTV. Therefore, individuals should discuss this with their lender for accurate loan qualification details.
What are the different factors that affect the loan-to-value ratio?
Understanding the factors that influence the loan-to-value ratio can help borrowers maximise their borrowing potential. Here are some key factors to consider:
- Type of collateral
The type of collateral used for the loan is crucial. Lenders prefer stable assets which hold their value well and are easy to sell if needed.
- Credit score
Borrowers’ credit scores play a significant role in determining the loan-to-value ratio. A high credit score indicates low risk for lenders, making them more willing to lend a higher ratio.
- Loan term
Longer terms result in lower monthly payments but pose more risk to lenders. Consequently, lenders may be less willing to offer a higher ratio for longer-term loans.
- Down payment
A larger down payment reduces the ratio, making the loan less risky for lenders. Therefore, borrowers who contribute more upfront may qualify for a higher ratio.
How to apply for a loan against property?
If an individual is looking for steps on how to avail property loan, they need to follow the steps mentioned below:
Step 1: Go to the official website of the lending institution.
Step 2: Select ‘loan against property’, under the ‘Loans’ section,
Step 3: Next click on the ‘Apply for loan against property‘ option and check the eligibility criteria of the lending institution.
Step 4: Fill out the loan application process with the required details accurately.
Step 5: On needs to provide information about the property’s location, income, and annual turnover. Furthermore, they should consider adding co-applicants if applicable.
Step 6: Before submitting the application form, the borrower must ensure to attach all the necessary documents.
Step 7: Click on the ‘Submit’ button after completing the steps.
Eligibility criteria for getting a loan against property
Following are some of the essential criteria that borrowers need to fulfil to stand eligible for getting approval for their LAP application:
- Applicant should be an Indian citizen and reside in a location where the financial institution operates.
- They should either be a salaried individual or a self-employed person.
- Self-employed people should have an age range between 25 and 70 years and must have a business of a minimum of 5 years.
- Salaried people must be between 28 and 60 years old. Also, they should have a work experience of 3 years in a reputed government or private company.
Many financial institutions in India provide pre-approved offers at attractive rates to their existing customers. These offers speed up the application process and are usually applicable on loans against property, home loans, etc. Interested individuals can check their eligibility for these offers by entering their details on the official website of the lending institutions
Mastering the loan-to-value ratio is crucial for borrowers to get the loans approved efficiently. By understanding how different factors influence the LTV ratio, borrowers can make informed decisions to improve their chances of loan approval from lenders.
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